What are the Economic Implications of Moving Away from Paying a Single Price for a Single Drug?

Article by: Amanda Cole
Our latest Research Paper explores the impact on payers, patients and innovators of differential prices for different uses of pharmaceuticals.
The value of a drug can vary substantially depending on what it is used for. A single drug may be useful at different stages of a disease, when used in combination with another drug, or when used for a different disease entirely. Increasingly, drugs are being licensed for multiple indications, yet assessments of value are, in most countries, based on a single price for a single drug. Where the clinical value derived from a drug varies across contexts, the relationship between price and value also varies.
Innovative payment models – which could permit different levels of payment for different uses – have been proposed. These could range from outcome-based payments at the individual patient level, to a suite of different prices for different uses/indications. Whatever the format, the proposal is to allow differential pricing for pharmaceuticals. The term indication-based pricing (IBP) is often used in medical and health economics literature to refer to this concept. In an OHE Consulting report published last month, Towse, Cole and Zamora provided a review of the current debate around IBP in the literature, as well issues affecting its potential use in five major European countries and the U.S.
In the report published today, for which research funding was provided by IQVIA, OHE authors Amanda Cole, Adrian Towse, and Paula Lorgelly, along with King’s College London collaborator Professor Richard Sullivan, address the question: What are the economic implications of an alternative to single-price payments for pharmaceuticals?   
Indication-based pricing offers the opportunity to better align payment with value, but the impact on patients, payers, and incentives for innovation are not clear-cut. Two key papers offer competing perspectives. Bach (2014) described the potential for IBP to increase transparency and illustrated how IBP could lead to lower prices for lower value indications, while Chandra and Garthwaite (2017) argued that IBP would lead to higher prices overall. The key differences arose from assumptions as to where (single) prices are currently set, and the extent to which IBP could expand patient access by allowing further indications to be developed.
In our new Research Paper, we describe how the implications of a move away from a single-price model toward indication-based pricing (or similar) can be considered in terms of the short-term (static) effect, and the long-term (dynamic) effect. In the short term, economic theory indicates that indication-based pricing can improve welfare if it means that more patients can access the drug as a result, if, for example, in the single-price scenario, certain indications are not developed in order to protect price in higher value indications. However, prices may also go up for some indications (if the single price is not set at the highest value indication), with a transfer of some economic surplus from payers to manufacturers. 
Longer-term ‘dynamic’ effects are often overlooked, yet the impact on research and development (R&D) and incentives for innovation must be considered. Firstly, additional indications that provide cost-effective treatment are likely to be developed. Secondly, scientific progress stimulates competition and often leads to several products coming to market in a therapy class. This is particularly the case in recent developments in oncology. We propose that a move to indication-based pricing would: (i) provide efficient R&D incentives which stimulate the development of new indications and greater access for patients, and (ii) increase price competition at indication-level, which could lead to lower prices. The latter effect would transfer surplus from innovators to the payer.  
In order to explore the potential impact of competition, we identify two classes of cancer therapy: tyrosine-kinase inhibitors (TKIs) and PD-1/PD-L1 inhibitors and show how competing products and competing indications have developed over time. In the case of the PD-1/PD-L1 inhibitors, additional indications are currently in development with more competing therapies expected to enter the market for several further cancer types. We illustrate how competition by indication in the PD-1/PD-L1 space could, in theory, reduce prices below the value-based price. 
The report also briefly sets out the challenges of implementing IBP. As well as having an economic regulatory regime that supports the use of IBP and prevents arbitrage between low-value and high-value uses, the key challenges are informational. At a minimum, data that tracks use by patient is needed, at least for a sample of patients. Collecting real-world data on the treatment outcomes achieved by patients will increasingly be required, again, at least for a sample of patients. However, proxies for, or surrogate measures of, outcomes can also be used to support the use of IBP, for example on patient duration of treatment as a proxy for patient benefit. Pragmatic approaches have the potential to address health care needs whilst achieving better value for money.
Download the full report here.
Cole, A., Towse, A., Lorgelly, P., and Sullivan, R., 2018. Economics of Innovative Payment Models Compared with Single Pricing of Pharmaceuticals. OHE Research Paper, London: Office of Health Economics.
Related Research
Towse, A., Cole, A., and Zamora, B., 2018. The Debate on Indication-Based Pricing in the U.S. and Five Major European Countries. OHE Consulting Report, London: Office of Health Economics. RePEc
Mestre-Ferrandiz, J., Towse, A., Dellamano, R. and Pistollato, M., 2015. Multi-indication Pricing: Pros, Cons and Applicability to the UK. OHE Seminar Briefing, London: Office of Health Economics. RePEc
Towse, A., Pistollato, M., Mestre-Ferrandiz, J., Khan, Z., Kaura, S. and Garrison, L., 2015. European Union Pharmaceutical Markets: A Case for Differential Pricing? International Journal of the Economics of Business, 22(2), pp.263-275. DOI | RePEc

Posted in Pricing and Reimbursement, Value-Based Pricing | Tagged Research Papers